Market report: Sterling soars towards the $2 barrier

The pound soared to a 16-month high against the dollar of $1.91 last week after the Monetary Policy Committee raised interest rates by a quarter of a point to 4.75 percent on Thursday.

Some analysts saw the rise as an indication that the pound may reach the significant $2 mark, a level last reached in September 1992.

Sterling also jumped 1.4 per cent to a seven-month high of £0.6752 against the euro and 2.5 per cent against the yen to Y218.21, its highest level since October 1998.

European shares and bonds plunged on Thursday after the interest rate rise surprised most market players and investors sold out of stocks and bonds. The rate rise saw the UK benchmark index fall 1.6 per cent to 5,838.4, finally closing the week down 4.5 percent at 5,889.40. The FTSE All Share finished down 1.3 per cent over the five-day session to close at 2,987.70.

Positive sentiment on the back of soft US jobs data helped some of the European indices recover marginally by the end of the week. The FTSE Eurofirst 300, which fell 0.9 per cent after the rate rises, went up by 1.18 per cent to end the week at 1,345.46. The Frankfurt Dax reached 5,723.03, a rise of 0.31 per cent, while the Paris CAC reached 5,040.95, a gain of 0.25 per cent or 12.44 points on the week.

The US jobs data helped Wall Street to make good gains. By the end of the five-day session, the S&P 500 was up 0.06 per cent or 0.82 points at 1,279.36, while the Nasdaq Composite was up 0.4 per cent or 9 points at 2,085.05. The Dow Jones Industrial Average was up 0.2 per cent, or 20.65 points, to 11,240.35.

Asian shares also performed well last week, Japan benefited from rises in domestic stocks and continuing investor confidence that the country is staging an economic recovery. The Nikkei 225 closed up 0.2 per cent to 15,499.18, while the broader Topix gained 0.1 per cent to 1,571.7.

Attacks on pipelines in Iraq and the kidnap of four oil workers in Nigeria contributed to renewed supply concerns last week, and oil prices leapt accordingly. There was some respite, however, when on Friday, tropical storm Chris was seen as less severe. The move alleviated fears that the storm would disrupt refineries in the Gulf of Mexico, and prices eased finishing the week at $76.66 per barrel, up 4.06 per cent over the five-day session.

Gold prices rose to an intra-day high of $654.10 a troy ounce on Friday, before easing back to $642.85 on the day.

Over the week, gold rose $8.10 an ounce or 1.3 per cent. Copper prices gained more than 5 per cent or $420 to $7,910 a tonne on the London Metal Exchange on Friday as mine workers at the Escondida copper mine in Chile rejected a pay offer from management, heightening fears of a strike.

The red metal finally closed at $7,755 a tonne in London, a gain of 1.5 per cent over the week.

Market insight

Bonds

European government bond yields surged last week after the Bank of England and the European Central Bank raised interest rates to ward off rising inflation.

The move by the Bank of England to raise rates from 4.50 per cent to 4.75 per cent surprised the markets as most analysts had expected rates to be held. It is now expected by some analysts to go as high as 5.25 per cent.

Although the ECB's decision to raise rates to 3 per cent was anticipated, statements by Jean-Claude Trichet, the ECB president, indicated that the increases may continue, shaking investor confidence.

The UK 10-year bond yield rose 0.12 points over the week to 4.74 per cent while the two-year gilt was up to 4.918 per cent from 4.72 per cent at the beginning of the week.

The 10-year German Bund yield jumped 0.02 points to 3.97 per cent, while the two-year Schatz rose to 3.54 per cent, up 0.04 per cent, as investors took flight from bonds as well as shares.

US bond prices were, however, able to make gains after softer than expected employment data was released on Friday.

The data fuelled hopes that the Fed would halt the current cycle of interest rate rises and US bonds rallied accordingly.

The 30-year Treasury bond yield was up 0.12 points to the week up at 4.74 per cent.

The Telegraph Investor

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